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Central banks are buying the most gold since the end of World War II — here’s why
- Central banks have bought the most gold since the end of World War II, with the commodity becoming an increasingly valuable hedge against growing global instability.
- The near-record buildup in government debt globally, particularly in the US, makes other perceived risk-free assets less attractive.
- Gold is seen to have returns similar to equities in the current cycle, and a dip in supply makes it a more valuable asset for central banks and investors alike.
Central banks have been buying up gold at a rate not seen since World War II as concerns about geopolitics and the strong dollar see a shift in appreciation for the quintessential risk-free asset.
A broad combination of factors have led to gold’s resurgence, according to the research firm Bernstein. They include geopolitical risk, concerns about government debt, supply issues, and the perception that gold gives better returns over other assets.
“Beyond just the threat of inflation, it is also remarkable that, for the first time since the end of Bretton Woods and, indeed, since the end of the Second World War, central bank buying of gold has actually increased,” a note sent to clients by the firm said on Monday.
Equally, the case for gold purchases is boosted by the near-record levels of government debt in the US, which makes other potential risk-free assets more questionable and could increase inflation figures.
Gold is trading at $1,310 an ounce, up nearly 10% from its recent low in September.
As well as its value related to inflation, gold is likely to see demand increase, while supply will stay “flat at best,” Bernstein said, boosting its value to central banks and investors alike. “As with any other commodity, robust demand and weak supply implies price appreciation,” Bernstein’s analysts wrote.
Gold holdings had been on the decline for years but have seen a clear boost recently.
Bernstein also pointed out that beyond the conversation about central banks’ holdings of gold was its increase in use over jewellery. Both private and public “monetary” holding of gold have overtaken jewellery demand as the primary source of demand growth for gold in recent years, according to Bernstein.
Get the latest Gold price here.
Financial Times – Wary investors drawn to gold’s allure
Central-bank buying pushes prices higher after two tough years for gold bugs
Henry Sanderson and Neil Hume JANUARY 16, 2019
If gold is anything to go by, investors are increasingly anxious about the state of the world.
Volatile equity markets and fears of a global economic slowdown have helped gold rally 10 per cent from its August lows, putting it among the best performing metals over that period.
It is a sharp contrast to much of the past two years, when rising US interest rates, a strong dollar and buoyant equity markets hurt gold bugs and the shares of miners such as Barrick Gold, Newmont Mining and Goldcorp. And when there was a correction in US stocks in early 2018, the gold price failed to benefit.
Almost a year on, the big question is whether 2019 could prove a profitable year to own gold, which is typically bought as hedge or haven by investors. The amount of physical gold in exchange traded funds has risen to 71.9m ounces, close to the record high of 72m touched in May 2018.
“We haven’t seen flows like this since the first half of 2016 — when the gold market really took off,” says Joe Foster, a portfolio manager at VanEck in New York.
“There seems to be a change in sentiment and investor psychology. People are waking up to the fact that we are late in the economic cycle and we could be ending [it] in the next year or two. That brings more risk into the system; that’s why gold is moving up.”
Those flows, along with investors covering their bets against gold, have helped the yellow metal’s price recover from the 18-month low of below $1,200 a troy ounce touched last August.
Analysts say there are a number of reasons to think the gold price can break through the $1,300 mark and push higher.
These include still-fragile stock markets, the expectation that the Federal Reserve will hold off from interest-rate increases this year, and a weaker dollar, which makes the metal more appealing. Rising US rates have been a drag on gold since the metal provides no yield.
Goldman Sachs, one of the most influential banks in commodity markets, raised its gold forecast last week and now expects a gold price of $1,425 over the next year.
“To take a view on gold, you have to first take a view on broader markets,” said Tom Holl, BlackRock portfolio manager, natural resources. “If we continue to see elevated levels of macroeconomic uncertainty and risk adversity, then gold will probably continue its positive momentum.”
Some investors believe rising concerns over US debt levels could sharpen gold’s allure, according to John Hathaway, a senior portfolio manager at Tocqueville Asset Management in New York.
Last week, Fitch Ratings warned that a continued government shutdown in the US could lead to a credit downgrade on the country’s debt, which is rated AAA by the agency.
“The US is beginning to sport a debt-to-GDP ratio worthy of any banana republic,” says Mr Hathaway. “We believe that exposure to gold is both timely and potentially rewarding.”
Higher levels of debt will also make it hard for the Fed to raise rates and tighten monetary policy, adds Trey Reik, a senior portfolio manager at Sprott Asset Management in Connecticut.
“I do think the dollar is in the midst of a long-term weakening,” he says. “You cannot raise rates with that much debt in the system without causing economic collapse.”
The buying of gold by central banks is also at its highest level since 2015, as many authorities remain keen to diversify away from the dollar. Standard Chartered estimates that central banks bought 500 tonnes of gold last year. China was among the buyers, adding almost 10 tonnes, following more than two years of unchanged holdings.
“While Russia, Kazakhstan and Turkey dominate central bank purchases, a host of other central banks entered the official sector gold market last year,” says James Steel, chief precious metals analyst at HSBC.
Mr Steel notes that the list includes Hungary, which had been out of the gold market for decades, with the exception of modest purchases in 2017. The central bank of Poland also purchased gold for the first time in many years, he adds.
However, the multiple disappointments for gold bulls over the past year leave some wary. Gold has not breached the $1,300 level since June.
While ETF holdings have risen to their highest level in five years, traders in the futures markets have not yet placed significant bets on higher prices, according to ICBC Standard Bank, a unit of China’s largest lender.
“On the one hand this does present an opportunity for gold prices to move higher still, if investor length now comes into the market,” says ICBC analyst Marcus Garvey.
“However, on the other, it begs the question as to why this has not yet happened, given the number of catalysts already present. If any of the recent tailwinds for gold were to abate, it increases the likelihood for a period of price consolidation.”
Zak Mir: Small Cap Highlight ECR Minerals #ECR – Gold back in the spotlight as slowing global economic growth spikes renewed appetite
By Zak Mir, Financial Journalist
- Positive forecast for gold prices
- Australia Gold production ramp-up
- MicroCap Australian Gold explorer focus
Positive forecast for gold prices
Sharp declines in global stock markets over the past few weeks saw Gold hit a three month high as political uncertainty continues to grow across the world.
In August prices for the precious metal fell below $1,200 per troy ounce mark for the first time in more than two and a half years’, down 12% since April. The turn largely caused by the US Dollars unexpected performance and aggressive monetary policy marked it’s worst losing streak since 2013.
However, October has seen a marked turnaround in the Gold price: the yellow metal grew by 3.3% in October, and continuing into November saw $1,233 per ounce as investors and hedge funds continue selling off global equities in search of reduced risk amidst geopolitical and economic uncertainty. Safe haven demand for gold has been driven by ongoing fears of a trade war between the US and China, growth concerns in China and the ongoing Brexit saga amongst a number of other issues.
Observers have been universal in their support. Mark O’Byrne, research director at Dublin-based GoldCore said: “Safe-haven gold is again acting as a hedge and safe-haven asset, exactly when investors need one.” “Throughout its history, Gold has served as a stable, safe haven investment during times of economic slowdown and following the International Monetary Fund (IMF) downward revision of the global economic growth for next year we might see more investors buying up the commodity.”
Others have noted how the nature of intra-year seasonal cycles may are likely to lead to increase in the price of gold. The Street says “massive washouts like the one we’re experiencing in gold right now are the fathers of subsequent rallies”.
Speaking on the Bloomberg Markets podcast Ruth Crowell CEO of the London Bullion Market Association discussed how the groups Annual Gathering this year predicted the most bullish forecast since 2012 with a forecast of $1,585 per ounce for next October. Ruth explains that this years price is reflected by ‘the macroeconomic outlook, ultimately talking about a lot of concerns’. Meanwhile a poll conducted by Reuters this month they found that of the 39 analysts and traders polled they expected gold prices to average $1,300 an ounce in 2019.
Australia Production Ramp Up
On the supply front, according to Bloomberg the world’s largest miners look set to increase spending for the first time since 2013 while the value of sector M&A activity has hit the highest levels in six years.
As a result, Gold production looks to set for further ramp ups through the end of 2018 and into 2019.
In particular production in Australia, the world’s second-largest Gold producer, may rise to a record this year and next as a stream of new projects come on line. Comments from Australian mining consultancy Surbiton Associates in the Sydney Morning Herald highlighted how Australian gold miners, among the lowest cost globally, have enjoyed high margins in recent years, with output boosted by the strengthening US dollar, which has in turn ‘supercharged’ Australian dollar prices.
MicroCap Australian Gold explorer focus – ECR Minerals
While the giants such as Newcrest Mining, AngloGold, Newmont Mining and Barrick Gold Corp tend to dominate the headlines, this upturn in sector activity has seen a marked increase in funding for small and microcap Gold exploration companies. Following a strategic financing round in July 2018, microcap Gold exploration company ECR Minerals has delivered a steady stream of exploration news updates, which has resonated among institutional and retail investors during Q3. ECR are conducting exploration activities across their numerous projects in Victoria, which is by far the most accessible and productive area of gold in Australia. In the 70 or so years from the 1850’s until the 1920’s, approximately 2,100 tons of officially recorded gold was recovered from Victoria and today it continues to be a favourite area for metal detector prospecting.
Listed on London’s AIM market, ECR’s exploration projects underway include Avoca, Bailieston, Moormbool and Timor gold projects in Central Victoria.
In mid September, ECR announced that it had ‘identified eight principle targets within the Company’s five exploration licence areas’ and had developed an exploration programme ‘designed to test surface gold mineralisation across the licence areas.’
At the end of September the Company confirmed gold mineralisation, with 22 samples from 76 containing gold grades ranging from 0.5 g/t to 67.4 g/t (2.17 ounces per ton). Their second assay results proved positive too, with 29 samples delivering gold mineralisation ranging from 0.56 g/t Au to 22.9 g/t Au;
ECR’s next rock chip sampling results will come from the Creswick area, where prior mapping has revealed a large gold system. Sounds promising.
So whether you’re buying bullion, investing into Gold majors as a proxy for the yellow metal or speculating on Microcap Gold explorers, the shiny near term outlook for Gold, and in particular Gold explorers operating in Australia looks unlikely to be tarnished